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The Upcoming Earnings Season Will Be Important

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In his Daily Market Notes report to investors, Louis Navellier wrote:

Encouraging January

Optimism about softer inflation continues, and stocks are higher.

Stocks went out on a high yesterday and continued the upward trend this morning, approaching the midday high of last Friday. The NASDAQ is on its way to the first 4-day run-up since September. Investors are encouraged by a strong start in January which historically has led to strong years.

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Hopes for a Fed pivot in 2023 are not dead despite the insistence by all Fed speakers that they want to get to 5% and stay there until 2% inflation is reached and holds there.

Important Earnings Season

The more important leg will be the upcoming earnings season and the outlook expectations laid out during the earnings calls. Even if the Fed softens their rhetoric, earnings estimate cuts, if they come, will dominate.

Note that Europe stocks are also higher, now only 8% from their highs despite all their problems. The reopening of China is a strong demand driver the market is trying to price in, as seen in the rally in copper where China is the largest buyer in the world.

Interest rates also aren't reflecting 5% Fed funds for long with the US 2-year at 4.25% and 10-year at 3.58% European yields are falling too. The inverted yield curve is usually due far more to a flight to quality from recession fears, bidding up long maturities for stronger price moves, rather than an artificial boost of the short end by central banks actually trying to slow the economy.

The US dollar index remains at 103, gold is flat at $1,875, crude oil is up 2% to $76.50, but natural gas is now below $3.50.

Pivot Rally

Odds are looking better for a soft CPI tomorrow morning. The State Street Pricestats data, which has done a good job of forecasting CPI moves, is pointing to a significant drop potential either this month or next. While if correct this may slow down the Fed's resolve, it also may mean a slowing in demand.

We may see a "pivot rally" tomorrow, but the follow-through will take a solid earning season. Keep the bias to high-quality earnings until the earnings outlook comes more into focus.

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